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FDIC Comprehensive Seminar On Deposit Insurance Coverage For Bankers

FDIC Comprehensive Seminar On Deposit Insurance Coverage For Bankers. January 2012. Outline. Part 1 – General Principles Part 2 – Ownership Categories Part 3 – Ownership Category Requirements Part 4 – Fiduciary and Agency Accounts Part 5 – Bank Mergers and Failures

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FDIC Comprehensive Seminar On Deposit Insurance Coverage For Bankers

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  1. FDIC Comprehensive Seminar On Deposit Insurance CoverageFor Bankers January 2012

  2. Outline Part 1 – General Principles Part 2 – Ownership Categories Part 3 – Ownership Category Requirements Part 4 – Fiduciary and Agency Accounts Part 5 – Bank Mergers and Failures Part 6 – Deposit Insurance Coverage Resources 2

  3. Seminar on Deposit Insurance Coverage PART 1 GENERAL PRINCIPLES 3

  4. Part 1 General Principles Basic Insurance Coverage • The Standard Maximum Deposit Insurance Amount (“SMDIA”) is $250,000 Under 12 C.F.R. § 330.1(n), adjusted pursuant to subparagraph (F) of section 11(a)(1) of the FDI Act (12 U.S.C. 1821(a)(1)(F)) • Coverage includes principal and interest earned up to the date of a bank’s closing Note: The examples in this presentation are interest-bearing accounts unless otherwise specifically indicated

  5. General Principles Basic Insurance Coverage Coverage includes principal and interest earned up to the SMDIA Part 1 Jane Smith Balance Principal Amount $ 248,000 Accrued Interest 3,000 Total $ 251,000 Insured $ 250,000 Uninsured $ 1,000 5

  6. General Principles Part 1 6

  7. General Principles Coverage Per Depositor Deposit Insurance Coverage is calculated per depositor (owner of the deposit account) A depositor can be the following: a person a business/organization a government entity A depositor does not have to be a citizen or resident of the United States to be eligible for deposit insurance coverage Part 1 7

  8. General Principles Deposit Account Records In the event of a bank failure, the FDIC relies on bank deposit account records to determine ownership Examples of bank deposit account records may include: Signature cards Certificates of Deposit Account ledgers and computer records that relate to the bank’s deposit-taking function Official items Other books and records of the bank Part 1 8

  9. Coverage Per Bank Deposit insurance coverage is also calculated per bank Deposits placed in the branch offices of a bank with the same charter are added together Deposits placed in separately chartered banks are separately insured Deposits in separate branches of a bank are not separately insured even if the branches are in different states General Principles Part 1 9

  10. Death of an Account Owner The death of an account owner will in most cases reduce the amount of deposit insurance coverage If an account owner dies, for the purpose of calculating deposit insurance coverage, the FDIC provides a six-month grace period during which the account will be insured as if the account owner had not died After the six-month grace period, the funds will be insured according to the ownership category in which the deposits are held General Principles Part 1 10

  11. Seminar on Deposit Insurance Coverage PART 2 OWNERSHIP CATEGORIES 11

  12. Questions every bank employee must ask and answer to calculate FDIC deposit insurance coverage: Who owns the funds? What ownership category is the depositor eligible to use or attempting to use? Does the depositor meet the requirements of that category? Will any of the depositor’s accounts meet the definition of a “noninterest-bearing transaction account”? Part 2 Ownership Categories 12

  13. Who Owns the Funds? Calculating the amount of FDIC deposit insurance coverage begins with determining who is the owner(s) of the deposit funds FDIC deposit insurance is based on the ownership of the deposit funds—also referred to as an ownership capacity or ownership category Part 2 Ownership Categories 13

  14. Part 2 Ownership Categories An “ownership category,” also referred to as “right and capacity” in the deposit insurance regulations, is defined by either a federal statute or by an FDIC regulation and provides for separate FDIC deposit insurance coverage If a depositor can meet the rules for a specific category, then their deposits will be entitled to both of the following: • Up to the SMDIA in deposit insurance coverage that is provided for under the ownership category, and • Separate coverage from funds that may be deposited under a different ownership category 14

  15. Part 2 Ownership Categories Owners = Individuals Owners = Business/Organizations CATEGORY 1 SINGLE ACCOUNTS CATEGORY 2 JOINTACCOUNTS CATEGORY 3 REVOCABLE TRUST ACCOUNTS CATEGORY 7 CORPORATION PARTNERSHIP UNINCORPORATED ASSOCIATION ACCOUNTS CATEGORY 4 IRREVOCABLE TRUST ACCOUNTS CATEGORY 5 CERTAIN RETIREMENT ACCOUNTS CATEGORY 6 EMPLOYEE BENEFIT PLANACCOUNTS Owners = Government Entities or Political Subdivisions CATEGORY 9 PRINCIPAL & INTEREST FUNDS IN MORTGAGE SERVICING ACCOUNTS - TEMPORARY - CATEGORY 10 NONINTEREST-BEARING TRANSACTION ACCOUNTS CATEGORY 8 GOVERNMENT ACCOUNTS 15

  16. Seminar on Deposit Insurance Coverage PART 3 OWNERSHIP CATEGORY REQUIREMENTS 16

  17. Part 3 Ownership Category Requirements Owners = Individuals CATEGORY 1 SINGLE ACCOUNTS CATEGORY 2 JOINT ACCOUNTS CATEGORY 3 REVOCABLE TRUST ACCOUNTS CATEGORY 4 IRREVOCABLE TRUSTACCOUNTS CATEGORY 5 CERTAIN RETIREMENT ACCOUNTS CATEGORY 6 EMPLOYEE BENEFIT PLAN ACCOUNTS 17

  18. Part 3 Hypothetical Signature Card

  19. Part 3 Hypothetical Signature Card Ownership Categories Single Accounts (Cat. 1) (Cat. 2) Joint Accounts Revocable Trust Accounts (Cat. 3) Irrevocable Trust Accounts (Cat. 4) Corporation, Partnership, Unincorporated Association Accounts (Cat. 7) (Cat. 8) Public Unit/Government Accounts NOT AN OWNERSHIP CATEGORY - Insurance coverage “passes through” the fiduciary to the actual owner, based on how the funds are held Certain Retirement Accounts* (Cat. 5) *Note: Self-directed defined contribution plans are included under Category 5

  20. Part 3 Category 1 – Single Account Category Single Accounts - 12 C.F.R. § 330.6 Deposit must be owned by a “natural person” • Sole Proprietorship Deposits: • Funds owned by a Sole Proprietorship or DBA are insured in this category (not in Category 7 – Business/Organization) • If a sole proprietorship or DBA is co-owned and the owners have equal rights to withdraw from the account, the account will likely be insured under Category 2 – Joint Accounts • Decedent Deposits or Estate Accounts: • Accounts established for a deceased person (i.e. Decedent’s or Estate Accounts) are insured in this category (not Category 3 - Revocable Trust Accounts) 20

  21. Part 3 Category 1 – Single Account Coverage A depositor is insured for up to $250,000 for all Category 1 – Single Account deposits • If the depositor, a single owner, names beneficiaries, the deposit will be analyzed as a Category 3 – Revocable Trust deposit • Category 1 – Single Account is the default category for depositors who do not meet the requirements of another category 21

  22. Part 3 Category 1 – Single Account – Jane Smith 22

  23. Part 3 Category 2 – Joint Account Requirements Joint Accounts - 12 C.F.R. § 330.9 Deposits owned by two or more natural persons Requirements: • Each co-owner must be a natural person • Corporations, Partnerships, Associations, Trusts and Estates are not eligible for Joint Account Coverage • Each co-owner must sign the signature card (CD exception) • Each co-owner must have same withdrawal rights as the other co-owner(s) Note: FDIC assumes ownership of a joint account is equal unless otherwise stated

  24. Part 3 Category 2 – Joint Account Coverage If all the requirements are met, then the amount of deposit insurance coverage is up to $250,000 for each owner of all Category 2 – Joint Account deposits Remember! If a depositor establishes multiple joint accounts, the owner’s shares in all joint accounts are added together and insured up to $250,000 24

  25. Deposit insurance is not increased by: rearranging the names listed on multiple joint accounts substituting “and” for “or” in account titles for multiple accounts or using different Social Security numbers on multiple joint accounts If the depositors name beneficiaries, the deposit will be analyzed as a Category 3 – Revocable Trust deposit Category 2 – Joint Account Coverage Part 3 25

  26. Part 3 Category 2 – Multiple Joint Accounts Example: Are all of the owners fully insured? 26

  27. Category 2 – Multiple Joint Accounts - Example Part 3 27

  28. Part 3 Category 2 – Joint Account Coverage Death of an Account Owner Example: John and Jane Smith opened a joint account for $500,000. John dies on March 31, 2011. What is the deposit insurance coverage for the account? For six months after John’s death, the account will be insured for $500,000 as though John was still living. After the six-month grace period, beginning October 1, 2011, assuming the account has not been restructured and Jane does not have any other single accounts at that bank, she would be insured for $250,000 in her Category 1 – Single Account and uninsured for $250,000

  29. Part 3 Category 3 – Revocable Trust Accounts Revocable Trust Accounts - 12 C.F.R. § 330.10 What is a revocable trust account? • A deposit account that indicates an intention that the funds will belong to one or more named beneficiaries upon the last owner’s death What does revocable mean? • The owner retains the right to change beneficiaries and allocations or to terminate the trust What are the types of revocable trusts? • Informal revocable trusts • Formal revocable trusts 29

  30. Part 3 INFORMAL FORMAL POD ITF ATF Living Trust Family Trust Category 3 – Revocable Trust Account Types Payable-on-Death (“POD”) or other similar terms such as In-Trust-For (“ITF”) or As-Trustee-For (“ATF”) must be in the account title Account must be titled in the name of the formal trust 30

  31. Part 3 Category 3 – Revocable Trust Requirements Updated on October 19, 2009! 12 C.F.R. § 330.10(b) provides that trust relationship must exist in the account title • Commonly accepted terms such as “payable-on-death”, “in trust for” and “as trustee for” must appear in the account title • For purposes of this rule, “title” includes the electronic deposit account records of the bank • The FDIC will recognize the account as a revocable trust account provided that the bank’s electronic deposit account records identify the deposit as a POD account. For instance, this designation can be made using a code in the bank’s electronic deposit account records

  32. Part 3 Category 3 – Revocable Trust Requirements Who is a beneficiary? • The owner and beneficiary no longer must meet the kinship requirement that each beneficiary must be related to the owner from one of the following five groups: parent, sibling, spouse, child, or grandchild Who or what can be a beneficiary? • The beneficiary must be an eligible beneficiary as defined below: • A natural person (living) • A charity (must be valid under IRS rules) • A non-profit organization (must be valid under IRS rules) 32

  33. Who or what is or not allowed as a beneficiary? Any object or entity that does not meet the eligibility requirements, such as a deceased person, a fictional person or a pet will be considered an invalid beneficiary. Any beneficiary that is not legally entitled to receive funds upon the owner’s death will not be considered in determining deposit insurance coverage What about deposits opened “POD to the Trust?” Ifa deposit account is titled, as an example, “John Smith POD to the John Smith Revocable Trust” the FDIC will treat the deposit as an account in the name of the depositor’s revocable trust (i.e., “the John Smith Revocable Trust”) Category 3 – Revocable Trust Requirements Part 3 33

  34. Coverage depends on the number of beneficiaries named by an owner and the amount of the deposit The owner names five or fewer unique eligible beneficiaries and the total deposit(s) allocated to all beneficiaries combined is $1,250,000 or less, then the insurance coverage is: Up to $250,000 times the number of unique eligible beneficiaries named by the owner. This applies to the combined interests for all beneficiaries the owner has named in all (both informal and formal) revocable trust deposits established in each bank The result is the same as above even if the owner has allocated different or unequal percentages or amounts to multiple beneficiaries. To calculate the deposit insurance coverage, multiply $250,000 times the number of owners times the number of unique eligible beneficiaries Category 3 – Revocable Trust Coverage Part 3 34

  35. Coverage depends on the number of beneficiaries named by an owner and the amount of the deposit 2. The owner names six or more unique eligible beneficiaries and the deposit is greater than $1,250,000: If the owner is attempting to insure more than $1,250,000 with six or moreunique eligible beneficiarieswherethe allocation to each and every beneficiary is equal, the deposit insurance coverage is $250,000 times the number of unique eligible beneficiaries If the owner is attempting to insure more than $1,250,000 with six or more unique eligible beneficiarieswithunequalpercentages or dollar amount allocations to the beneficiaries, please call the FDIC at 1-877-275-3342 or sign up for one of the FDIC’s 2012 Seminars on Revocable Trust Accounts for Bankers Part 3 Category 3 – Revocable Trust Coverage 35

  36. Unequal Beneficiary Allocations – POD Account Example 1:Balance Account #1: John POD Mary = $ 350,000 Account #2: John POD Sara = 50,000 Total = $ 400,000 Are these accounts fully insured?YES! When five or fewer unique eligible beneficiaries are named, the insurance coverage is calculated as the number of owners times the number of beneficiaries. In this example, with one owner and two beneficiaries, the coverage is $500,000: (1 owner times 2 beneficiaries times $250,000 = $500,000) Since the total of both accounts is $400,000, this amount is fully insured because the combined balance is less than $500,000 Category 3 – Revocable Trust Coverage Part 3 36

  37. Unequal Beneficiary Allocations – POD Account Example 2: Balance Account #1: John POD Mary = $ 350,000 Account #2: John POD Sara = 175,000 Total = $ 525,000 Are these accounts fully insured? NO! The combined amount of $500,000 is insured with $25,000 uninsured The insurance coverage calculation is: One owner times two beneficiaries times $250,000 = $500,000 What if the bank fails? Can or will the FDIC “revert or default” the uninsured $25,000 back to Category 1 – Single Accounts if John has not used this category? NO! Category 3 – Revocable Trust Coverage Part 3 37

  38. Part 3 Category 3 – Revocable Trust Misconceptions Example 3: Facts: John POD Lisa What is the maximum amount that can be insured for this deposit? Rule for revocable trusts with 5 or fewer beneficiaries: Number of Owners x # of Eligible Beneficiaries x $250,000 = Deposit Insurance (“DI”) Coverage John (Owner) POD Lisa (Beneficiary) $250,000 Correct Method! Common Misconception: The misconception is thatdeposit insurance is determined by counting or adding the total number of individuals listed on a POD account. This is incorrect! Incorrect Method! Coverage is NOT calculated as owners plus beneficiaries times $250,000 IMPORTANT! Remember that for revocable trusts with 5 or fewer beneficiaries, DI coverage is calculated as the number of owners times the number of beneficiaries times $250,000 38

  39. Part 3 Category 3 – Revocable Trust Misconceptions Example 4: Facts: John POD Alan and Betty What is the maximum insured amount for this deposit? John (Owner) POD Alan $250,000 POD Betty $250,000 • Rule for revocable trusts with 5 or fewer beneficiaries: • Number of Owners x # of Eligible Beneficiaries x $250,000 • = DI Coverage Correct Method! Incorrect Method! Coverage is NOT calculated as owners plus beneficiaries times $250,000 Common Misconception: The misconception is thatdeposit insurance is determined by counting or adding the total number of individuals listed on a POD account for a total of $750,000 in DI coverage. This is incorrect! 39

  40. Part 3 Category 3 – Revocable Trust Misconceptions Example 5: Facts: John and Mary POD Cindy What is the maximum insured amount for this deposit? John (Owner) Mary (Owner) Rule for revocable trusts with 5 or fewer beneficiaries: Number of Owners x # of Eligible Beneficiaries x $250,000 = DI Coverage $250,000 POD Cindy $250,000 Correct Method! Incorrect Method! Common Misconception: The misconception is thatdeposit insurance is determined by counting or adding the total number of individuals listed on a POD account which is three persons for a total of $750,000 in deposit insurance coverage. This is incorrect! 40

  41. Part 3 Category 3 – Revocable Trust Misconceptions Example 6: Account # 1 John POD Alice Facts: John opened three POD accounts. What is the maximum insured amount for these deposits? Account # 2 John POD Betty and Alice Rule for revocable trusts with 5 or fewer beneficiaries: Number of Owners x # of Eligible Beneficiaries x $250,000 = DI Coverage Account # 3 John POD Betty and Cindy Common Misconception: The misconception is that each beneficiary listed on a POD account would be counted even if the same beneficiary is listed repeatedly. This is incorrect! Although five names are listed, there are only 3 unique persons (Alice, Betty and Cindy) designated as beneficiaries. Under FDIC rules, for this example, we use 3 as the number of beneficiaries in the calculation Correct Method! 41

  42. Part 3 Category 3 – Revocable Trust Calculation Example 7: Depositor with a POD account naming 3 eligible beneficiaries Depositor with a living trust account Identifying the same 3 beneficiaries + Account # 1 David Smith POD to Andy, Betty and Charlie Balance is $750,000 Account # 2 David Smith Revocable Trust which names Andy, Betty and Charlie as beneficiaries Balance is $750,000 A depositor cannot establish both of these accounts and receive $1,500,000 of deposit insurance! The total coverage for both accounts is $750,000 42

  43. Balance Account #1: John POD Alice = $ 730,000 Account #2: John POD Lisa = 10,000 Account #3: John POD Betty = 10,000 Total = $ 750,000 While John is alive, the accounts are insured for up to $750,000. John dies on 01/01/2011 and under the six month rule the accounts can continue to be insurable as if John is alive unless either an account is closed or a named beneficiary takes possession of the account and changes the account title On 02/01/2011, a month after his death, Lisa, the beneficiary on Account #2, closes the account and withdraws the entire balance of $10,000 What is the deposit insurance coverage now that Account #2 is closed? Category 3 – Revocable Trust Coverage Part 3 Example 8: 43

  44. Example 8 (continued): Balance Account #1: John POD Alice = $ 730,000 Account #2: John POD Lisa = 10,000 Account #3: John POD Betty = 10,000 Total = $ 740,000 As a result of the closure of Account #2, John’s deposit insurance coverage is calculated considering only two beneficiaries (Alice and Betty) The total of the accounts under John’s name is now $740,000, but there are only two beneficiaries and therefore the deposit insurance coverage is reduced to $500,000 with $240,000 now being uninsured Category 3 – Revocable Trust Coverage Part 3 44

  45. Category 3 – Revocable Trust – HSA Definition: A Health Savings Account (“HSA”) is a tax-exempt trust or custodial account set up with a qualified HSA trustee, such as an FDIC-insured bank, to pay or reimburse certain medical expenses HSAs are insured based on who owns the funds and whether beneficiaries are named in the bank account records If a depositor opens an HSA with no beneficiaries named, then the FDIC would insure these funds under the depositor’s Category 1 –Single Ownership Accounts When beneficiaries are named, the FDIC will insure the owner of an HSA deposit under Category 3 – Revocable Trust Accounts in the same manner as a payable on death (POD) account IMPORTANT! The FDIC does not require “POD” or “ITF” be included in the account title for an HSA to be eligible for Category 3 –Revocable Trust Accountcoverage Part 3 45

  46. Irrevocable Trust Accounts - 12 C.F.R. § 330.13 For the purpose of FDIC deposit insurance, irrevocable means that the grantor (person who created the trust) does not possess the power to terminate or revoke the trust An irrevocable trust may be created through: Death of the grantor of a revocable living trust Execution or creation of an irrevocable trust agreement Statute or court order An irrevocable trust deposit must be linked to a written trust agreement There is no “POD” or “ITF” option Category 4 – Irrevocable Trust Requirements Part 3 46

  47. Insurance coverage for irrevocable trust deposits is usually no more than $250,000 No per-beneficiary coverage if: Owner retains interest in the use of the trust assets (if so, funds are insured to the owner as Category 1 – Single Account deposits) Interests of beneficiaries are contingent or not ascertainable (if so, all such interests are added together and insured up to $250,000) Contingency examples include: Beneficiaries do not receive funds unless certain conditions are met Trustee may invade principal of the trust on behalf of a beneficiary Beneficiaries or trustee may exercise discretion in allocating funds Category 4 – Irrevocable Trust Coverage Part 3 47

  48. Effective October 19, 2009 When a revocable trust deposit converts to an irrevocable trust because of the death of the owner(s), the FDIC may continue to apply the original revocable trust coverage provided the deposit was established at the bank while the trust was revocable Example: The “John Smith Revocable Trust” names his wife with a life estate interest and his two children as remainder beneficiaries. This trust deposit is opened for $750,000 in a two year CD and is fully insured. John died a year ago and the trust became irrevocable. The trust allows for his wife to use 100% of the assets during her life time if needed What is the maximum deposit insurance coverage allowed? Coverage will remain at $750,000 instead of dropping to $250,000 because the deposit in the bank was opened while the trust was revocable Category 4 – Irrevocable Trust Calculation Part 3 48

  49. Certain Retirement Accounts - 12 C.F.R. § 330.14(b)(2) Deposits typically owned by only one participant in Certain Retirement Accounts Titled in the name of the owner’s retirement account Coverage: $250,000 for all deposits in Category 5 – Certain Retirement Accounts Category 5 – Certain Retirement Accounts Part 3 49

  50. Types of accounts in this category are: Part 3 Category 5 – Certain Retirement Accounts A self-directed retirement account is an account for which the owner, not a plan administrator, has the right to direct how the funds are invested, including the ability to direct that the funds be deposited at a specific bank For deposits under this category such as IRAs, deposit insurance coverage cannot and does not increase by adding beneficiaries Note: All “defined benefit plans” are excluded from this category but included under Category 6 –Employee Benefit Plan Accounts 50

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